MNE3701 Assignment 2
(COMPLETE ANSWERS)
Semester 1 2025 - DUE 8
May 2025
For assistance contact
Email:
, QUESTION 1: Preparing Financial Statements for a Small Business (10 Marks)
Building financial statements is significant to understand the financial soundness and
performance of my small business. I would highlight the three fundamental statements: the
Income Statement, the Statement of Financial Position (Balance Sheet), and the Statement of
Cash Flows. Here's how I'd do it with real-world examples for a fictitious small online
bakery that makes custom cakes named "Sweet Creations":
1. Gathering and Organizing Financial Information:
Record Keeping: The basis for accurate financial accounts is proper documentation of
all activities related to money. These are:
Sales Invoices: Accounts for every single cake sold along with date, customer, description,
and cost.
Practical Example: Sales Invoice #SC-001 date 2025-04-30 for the "Chocolate Fudge Birthday
Cake" sold to "John Doe" for KES 5,000
Expense Receipts: All receipted business expense, categorized into type.
Practical Example: "Bakery Supplies Ltd." receipt on 2025-04-25 for flour (KES 1,000), sugar
(KES 800), and eggs (KES 500) totaling KES 2,300.
Bank Statements: Monthly totals of all cash payments and receipts.
Practical Example: Bank statement reflecting a KES 5,000 deposit from John Doe and a KES
2,300 withdrawal to Bakery Supplies Ltd.
Loan Agreements: Details of any loans borrowed, including principal, interest rate, and
repayment terms.
Practical Example: Loan agreement with "Small Business Bank" for KES 50,000 at an interest
rate of 12% per annum.
Asset Purchase Records: Documentation of any significant assets bought, e.g., mixers or ovens.
Practical Example: Receipt for a new commercial mixer bought on 2025-04-15 for KES 30,000.
Using Accounting Software or Spreadsheets: For accuracy as well as efficiency, I would use
accounting software (e.g., Xero, QuickBooks, Zoho Books) or a well-formatted spreadsheet
(e.g., Google Sheets, Microsoft Excel) to categorize and record these transactions. This helps in
summarizing data for the financial statements.
2. Preparing the Income Statement (Profit and Loss Statement):
The Income Statement shows the financial performance of the business. It
covers a specified period (month, quarter, or year). The formula is: Revenue - Expenses = Net
Profit (or Loss).
Revenue: The revenue from the primary business activities.
Practical Example: April 2025 revenue from cake sales: KES 45,000 (sum of all sales invoices).
Cost of Goods Sold (COGS): Direct costs involved in producing the goods sold. For Sweet
Creations, this is the cost of ingredients.
Practical Example: Total cost of flour, sugar, eggs, butter, etc., used for cakes sold in April 2025:
KES 15,000.
(COMPLETE ANSWERS)
Semester 1 2025 - DUE 8
May 2025
For assistance contact
Email:
, QUESTION 1: Preparing Financial Statements for a Small Business (10 Marks)
Building financial statements is significant to understand the financial soundness and
performance of my small business. I would highlight the three fundamental statements: the
Income Statement, the Statement of Financial Position (Balance Sheet), and the Statement of
Cash Flows. Here's how I'd do it with real-world examples for a fictitious small online
bakery that makes custom cakes named "Sweet Creations":
1. Gathering and Organizing Financial Information:
Record Keeping: The basis for accurate financial accounts is proper documentation of
all activities related to money. These are:
Sales Invoices: Accounts for every single cake sold along with date, customer, description,
and cost.
Practical Example: Sales Invoice #SC-001 date 2025-04-30 for the "Chocolate Fudge Birthday
Cake" sold to "John Doe" for KES 5,000
Expense Receipts: All receipted business expense, categorized into type.
Practical Example: "Bakery Supplies Ltd." receipt on 2025-04-25 for flour (KES 1,000), sugar
(KES 800), and eggs (KES 500) totaling KES 2,300.
Bank Statements: Monthly totals of all cash payments and receipts.
Practical Example: Bank statement reflecting a KES 5,000 deposit from John Doe and a KES
2,300 withdrawal to Bakery Supplies Ltd.
Loan Agreements: Details of any loans borrowed, including principal, interest rate, and
repayment terms.
Practical Example: Loan agreement with "Small Business Bank" for KES 50,000 at an interest
rate of 12% per annum.
Asset Purchase Records: Documentation of any significant assets bought, e.g., mixers or ovens.
Practical Example: Receipt for a new commercial mixer bought on 2025-04-15 for KES 30,000.
Using Accounting Software or Spreadsheets: For accuracy as well as efficiency, I would use
accounting software (e.g., Xero, QuickBooks, Zoho Books) or a well-formatted spreadsheet
(e.g., Google Sheets, Microsoft Excel) to categorize and record these transactions. This helps in
summarizing data for the financial statements.
2. Preparing the Income Statement (Profit and Loss Statement):
The Income Statement shows the financial performance of the business. It
covers a specified period (month, quarter, or year). The formula is: Revenue - Expenses = Net
Profit (or Loss).
Revenue: The revenue from the primary business activities.
Practical Example: April 2025 revenue from cake sales: KES 45,000 (sum of all sales invoices).
Cost of Goods Sold (COGS): Direct costs involved in producing the goods sold. For Sweet
Creations, this is the cost of ingredients.
Practical Example: Total cost of flour, sugar, eggs, butter, etc., used for cakes sold in April 2025:
KES 15,000.
